EconH200L10

EconH200L10 - Perfectly Competitive Markets A firm's...

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Perfectly Competitive Markets A firm’s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the Cincinnati Bengals raise their ticket prices by 5%, there will be a small reduction in the quantity of tickets demanded. If the corner gas station raises its gasoline prices by 5%, there will be a huge reduction in the gas demanded. In a very competitive market like the local gasoline market, a single station has very little choice in what price to charge. If the station is busy there is no reason to lower the price, but if it raises its price by 10 cents a gallon, it will have almost no customers. We will study the extreme case of perfect competition, where firms are “price takers.”
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In a perfectly competitive market , (i) there are many buyers and sellers, so each buyer or seller is a price taker , (ii) all sellers supply the same, identical product. This is the model of supply and demand. If a seller could influence the price, it would not be acting according to a supply curve. In the long run , we also require that (iii) firms can freely enter or exit the market.
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Revenue of a Competitive Firm For a competitive firm, the price it receives does not depend on the quantity it chooses to sell. Marginal revenue equals the price of its output
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EconH200L10 - Perfectly Competitive Markets A firm's...

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